Reduced BPO tax perks to stifle sector’s growth

Manila, May 30, 2017 - Several tax measures that intend to help the Philippine government bolster its revenues and eventually fund its ambitious infrastructure development program have been forwarded to Congress. Among the measures sponsored by the Department of Finance (DOF) is the rationalization of fiscal incentives awarded to foreign outsourcing firms operating in the country. While the proposal broadens the government’s revenue base, it diminishes the Philippines’ competitiveness as a major outsourcing hub.

The first package of the Department of Finance-sponsored tax reform program includes the removal of value added tax (VAT) exemption on BPOs’ sales and imports. Once the tax reform proposal is enacted, BPO firms’ transactions would be subject to a VAT equivalent to 12% of gross receipts.

The removal of the zero-VAT status will hinder the government’s ability to attract more outsourcing investments. These tax incentives have lured large Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) companies to set up shop in Metro Manila and other key urban areas across the country. Removing this incentive from the current set of fiscal perks granted to outsourcing companies will derail existing firms’ expansion and prospective investors’ plans of opening shop in the country. Eventually, these will weaken the Philippines’ position as one of the most attractive sites for BPO and KPO operations in the world.

At present, there are 9 Philippine cities included in the Tholons list of Top 100 outsourcing sites in the world. Once the government rationalizes the fiscal perks, these urban areas would face stiffer competition from their ASEAN peers as they lose a major competitive edge and as other cities in the region try to lure companies by dangling a more attractive tax incentives package. Among the emerging BPO hubs in the region that are competing for a greater fraction of the global outsourcing pie are Kuala Lumpur, Ho Chi Minh, Hanoi, and Singapore. These ASEAN cities belong to the upper third of Tholons’ elite list.

Aside from Metro Manila, which is regarded as the second most competitive BPO destination in the world, other Philippine cities included in the Tholons list are Cebu (7th), Davao (66th), Santa Rosa, Laguna (81st), Bacolod City (85th), Iloilo City (90th), Dumaguete (93rd), Baguio City (94th), and Metro Clark (97th). Local government units (LGUs) and ICT councils have been aspiring to see their respective cities be part of the prestigious list, but this will never eventuate given the planned removal of the fiscal perks. The planned reduction of incentives for BPO firms also contradicts the Duterte administration’s thrust of spreading more investments outside of the country’s capital.

The purging of incentives currently given to BPO and KPO companies will also offset the positive impact of a couple of government-led initiatives that have raised the competitiveness of the Philippine outsourcing sector. These include the enactment of the Department of Information and Communications Technology (DICT), Data Privacy Act, and Cybercrime Prevention Act; as well as the government’s plan of building a national broadband network (NBN).

The other parts of the Comprehensive Tax Reform Program are commendable as they intend to reduce both personal and corporate income tax rates; raise the Filipinos’ purchasing power; and create more jobs. However, the government shouldn’t limit the incentives it grants to a sector that has played a crucial role in boosting domestic demand and keeping the economy afloat amidst a precarious global economic environment.

The country’s lawmakers should also consider the tax proposal’s impact on the country’s employment and dollar reserves. At present, the entire outsourcing sector employs about 1.1 million Filipinos. In 2016, it generated USD23 billion in revenues. These prop up retail and residential spending in the country. Their expenditures spill over to other segments of the economy, including telecommunications, banking and finance, and hotel and leisure. The removal of zero VAT benefit will put these economic gains in peril.

In a recent forum organized by Colliers International Philippines, PEZA Director General Charito Plaza said the government is committed to keeping current policies and incentives for locators, but intends to encourage additional incentives through LGUs to spur development outside Metro Manila. The PEZA chief is also rallying for the exclusion of PEZA-accredited buildings and locations from the removal of the 0% VAT rating.

Ultimately, a common ground must be established, wherein the government generates additional tax revenues while retaining the country’s competitiveness as a global BPO hub.